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Prospectuses for new issues of convertible bonds in the European Union will have to make additional disclosures because of new regulations that will increase deal costs.

A convertible bond that converts into new shares and lists in the EU after July 1, when the prospectus directive comes into force, will be treated as equity under the directive. The disclosure requirements in the convertible-bond prospectus will be similar to that for an initial public offering and include an operating and financial review.

However, unlike a prospectus for shares, neither a working capital statement nor a statement of capitalisation and indebtedness will be required, according to a briefing note from Linklaters, the UK law firm. There are no exemptions for companies that have previously issued equity-linked bonds.

The prospectus must also include a summary of the characteristics and risks associated with the issuer, any guarantor, and the securities and three years’ financial information in accordance with international financial reporting standards. This detail could total 2,500 words.
Keith Thomson, head of equity and debt markets group at Linklaters, said: “The increased cost will be relatively significant for issuers that have not been through this process before.”

Last year European equity-linked issuance was €16bn ($21bn), less than half of the €42bn issued in 2003. Year-to-date volumes stand at €5.6bn, according to Dealogic, the investment banking research provider.

Exchangeable bonds and bonds convertible into existing shares are treated as debt and do not have to meet the requirements for equity disclosures in the prospectus directive.

In a briefing note, Linklaters said: “Consideration may be given to ways of structuring convertibles so as to avoid some of these effects, for example satisfying conversion rights from treasury shares or those held by a non-group company under a synthetic treasury structure, which may qualify the bonds as exchangeables rather than convertibles, or at least reduce the disclosure burden imposed upon issuers.”